An Iraqi Islamic bank is a joint-stock company licensed by the Central Bank of Iraq that takes interest-free deposits and investments and finances clients through sale, lease or partnership, under a Sharia board whose opinions are binding on management.
Three successive texts governing Iraqi Islamic banks
Banking Law 94 of 2004 applies to every bank in the country. Regulation 6 of 2011 then organised Islamic activity, before Law 43 of 2015 created a dedicated status with its own capital requirements and specific Sharia governance rules for these institutions.
Licences, windows and branches: the central bank's role
The Central Bank of Iraq grants licences, authorises Islamic windows with separate capital inside conventional banks and directly supervises branches of foreign Islamic banks. It applies the same prudential methods to these institutions as it does to conventional lenders.
How much capital does an Islamic bank need?
Law 43 of 2015 sets paid-in capital at 250 billion Iraqi dinars. One hundred billion must be paid on incorporation and the remainder in three equal annual instalments. The high threshold aims to keep out undercapitalised projects and protect depositors.
Five members, three jurists: who sits on the Sharia board
Each Islamic bank must appoint a five-member Sharia board: at least three fiqh specialists and at least two experts in banking, law or finance. Their three-year term is renewable with central bank approval, and their decisions are binding on management.
Current, savings and investment accounts
The law recognises three families of accounts. The current account is guaranteed and earns nothing. Savings and investment accounts share in the results of financed activity on a mudaraba basis, and rank differently if the bank goes into liquidation.
Musharaka, salam and istisna in business finance
Iraqi Islamic banks may fund agriculture, industry and construction through musharaka or mudaraba, buy a harvest forward through salam or order an asset to be manufactured through istisna. Ijara is used to lease equipment and buildings, with the bank remaining owner during the contract.
A 20 percent cap on direct stakes
The 2011 regulation let Islamic banks invest directly in commercial, agricultural, industrial or real estate projects, but capped each stake at 20 percent. The rule limits how much risk a bank can concentrate in a single unlisted company.
Operations ruled out under Iraqi rules
Any interest-based return is prohibited, as is buying and selling non-existent assets or trading in debt. A bank therefore cannot discount a receivable at a markdown, nor sell goods it does not yet own and hold.
Mutual insurance funds for customers
The 2015 law allows Islamic banks to set up self-insurance and reciprocal insurance funds for the bank or its customers. This provision brings the Iraqi system close to the takaful model, built on solidarity contributions rather than a commercial premium.
2023: why dollar access hit these banks
In July 2023 the US Treasury and the Federal Reserve Bank of New York cut fourteen Iraqi banks off from dollar transactions, several of them private Islamic banks. Transfers must now go through an electronic platform, and the Fed rejects operations it considers suspicious.
Portfolio management through wakala
The law also lets Islamic banks manage investment portfolios and assets on behalf of third parties under a wakala contract. The bank then acts as agent for a fee agreed in advance, without guaranteeing the client's capital.
What to ask an Iraqi Islamic bank
Before opening an account, check the licence with the Central Bank of Iraq, the make-up of the Sharia board, the type of account offered, the profit-sharing method and the bank's ability to execute international dollar transfers.
Specialist external source
The Central Bank of Iraq website publishes the Islamic banking law, its implementing instructions and the list of licensed banks.